Alternative Loan Options For First Time Buyers

Have you always wanted to purchase your own home but thought you weren't able to because you don't make enough money, have bad credit, or are not able to come up with a down payment? A number of years ago, this may have been true, but nowadays there are a number of options including interest-only mortgage loans.

What are Interest-Only Mortgage Loans?

These types of loans gained popularity after the 1990's. Interest-only mortgage loans are a one-of-a-kind concept. Normally, when you have a regular mortgage, part of your monthly cost goes to paying off the principal balance and part of your cost goes toward your interest fees. If you are hoping to pay off your 15 or 30 year mortgage, you will be expected to pay a set amount of money each month.
But, with an interest-only mortgage loan, you are able to make payments on only the interest at the very least for the first five years. Interest-only periods can vary however depending on your choice of a three, five, seven, or ten year interest-only loan. Once you have selected the option which works best for you, you will only need to make the interest payments. You will only need to make payments toward the principal and the interest once your interest-only allotted time period ends.

Why is an Interest-Only Loan Beneficial?

One reason why these types of loans are so attractive to home buyers, is a down payment on a home is the initial mortgage payments are lower than with a conventional loan. If you were making monthly payments on a $200,000 loan for example, you might expect to pay $1200.00. But with an interest-only loan, your payments would be closer to $800.00 a month. That's substantial savings in this economy.

Pitfall of an Interest-Only Loan

There is always a flip side. After the interest-only period has ended, the home buyer will still owe the original loan amount. The homebuyer will need to start paying against the principal and the interest, and it is possible those mortgage payments may increase by 40%. Quite a few buyers may not be able to afford such an increase. And, this may not be the best option for someone planning on living in their home for a number of years. However, if you are able to make these higher monthly payments, than an interest-only loan may be a good bet.

Another option involves selling your home before the interest-only period ends. If home values in your area have increased significantly, you may capitalize from the equity. However, if the housing market takes a nosedive and home values decline, you may be unable to sell your home.

There is another option which involves selling your home before your interest-only period ends. You may be able to capitalize on your investment if property values in your area have gone up. On the other hand, should property values decrease as they have in recent times, your may be unable to sell your house that quickly.